Why some Singaporeans are selling their insurance policy
Why some Singaporeans are selling their insurance policy
EVERYTHING is a commodity these days. Facebook likes, views on your blog, forgiveness in a mega-church, and now even your insurance policy. For those of you who bought an endowment policy, and then regret it, there’s a way out. In case you haven’t heard it blaring over a radio advertisement yet, there are people out there who want to buy your policy:
How do you sell an insurance policy?
Firms like REPs Holdings, are in the market for resale insurance policies. If you approach them, they will give you a valuation on what your policy is worth. The payout that you get is typically up to 10 per cent of the Surrender Value (SV) that you’d get from your insurer.
For example, say you have an endowment policy that will mature in 10 years, but you want to get rid of it after three years. Maybe you shouldn’t have signed all those forms, just because that insurance agent bought you a $2 coffee and you felt obliged. So if you want to surrender it now, you get the Surrender Value (SV) of $5,000. However, the total premiums you’ve paid over three years may come to well over $8,000, so it’s a huge loss.
As an alternative, you can bring the policy to one of the aforementioned buyers. In this case, you might get $5,500 instead, and your policy and future payout then goes to the firm buying it. They make money, and you lose a little less money.
There are some requirements to selling your policy. It must be:
– An endowment policy (this is the type of policy that pays out a big sum after 10 or 15 years).
– Paid in cash, not with your CPF (nice try, but you’re not sneaking money out of your CPF that way)
– From an accepted insurer (you have to check with the organisation buying the policy, as to which insurers they consider acceptable – usually, any Singapore-based insurer is accepted).
– The policy has to be acceptable to the buyer. Some companies don’t buy policies that take longer than 15 years to mature, for example; so those of you with 25 year endowments might be out of luck. Likewise, some companies won’t buy policies with returns that are too low. Most endowment policies have returns of between three and five per cent, but a buyer may only want policies with returns of four per cent and above.
Is this legal?
It’s legal, but the market for resale endowment policies isn’t regulated by the Monetary Authority of Singapore (MAS). So an exception exists if the buyer of the policy (or an intermediary handling the sale) is already registered under the Securities and Futures Act (SFA), which they would have to be, to engage in certain other financial practices. In those situations, the company involved is regulated by MAS.
At any rate, the chances of fraud are low. Most of the time, the buyer will write you a cheque then and there, and the contract terms are quite straightforward.
What are the drawbacks to doing this?
Bear in mind that you’re transferring the policy to the entity buying it (they become the assignee), so don’t call and ask where your payout is 10 years later. Once you sign the form and accept the money, you haven’t got the endowment policy anymore. This includes any extras that may have come with it, like riders for personal accident insurance.
Who should consider selling their endowment policy?
There are a number of reasons to consider selling. The most common ones are:
– Your financial situation has changed for the worse, and for the long run
– The sale would be sufficient to cover high-interest debts
– Premiums payments have reached a break-even point with the payout
– Change in life expectancy
1. Your financial situation has changed for the worse, and for the long run
Let’s say you’ve gone from a job making $70,000 per annum, to driving an Uber car and making about $30,000 per annum. You’ll probably need to change your insurance policy to one with lower premiums, and that means surrendering the existing one. Selling the policy can mean getting a little more cash than the SV, and also help with the short-term situation.
2. The sale would be sufficient to cover high-interest debts
If you have high-interest debts, such as credit cards (24 per cent per annum), you could consider selling the endowment policy early to pay down or pay off your debt. There’s no way your endowment policy can accrue faster than a personal loan or credit card, so it might make sense to prioritise and get rid of the debt first.
If you’ve found a better investment with higher returns, you might want to switch from your endowment policy. This is a way to cash out that nets you a little more money. In some cases, you might be selling the endowment policy to buy another one, with higher returns.
4. Premium payments have a reached a break-even point with the payout
If the total premiums you’ve paid have come close to the eventual payout, you might want to cash out before it gets too disadvantageous. For example, if the total premiums you’ve paid so far are close to $30,000, and the eventual pay out at maturity is $30,000, you may decide to cash out now rather than keep on paying.
Selling the endowment plan does mean you’ll lose the insurance coverage; but if you don’t have a separate insurance policy anyway, you should probably talk to a Financial Advisor right now; an endowment plan is not comparable to most health insurance policies, and the insurance coverage on many endowment plans amounts to peanuts. It will maybe pay for a Panadol if you get cancer or something.
But in the off chance you fully rely on an endowment plan for insurance coverage, selling the plan means you’ll need to find a new one. So shop around and make sure the potential replacements won’t be more expensive. Sell your existing plan only after you’ve gotten coverage from a new one.
5. Change in life expectancy
If your health doesn’t allow you another 10 years and you have a 15 year policy, you may as well sell the policy; but bear in mind most insurers have provisions for these situations, so there may be a better deal than just selling for 10 per cent above SV.
Insurers should probably be pointing this out
Insurance agents should point out that selling an endowment policy is an option, besides just claiming the SV. In some cases, there’s no advantage to their client to make a few bucks less, especially if they are switching to a different policy with the same agent.
But tit for tat: when I checked, there was no requirement to inform your agent that you’re selling either. So if you would feel awkward cancelling your policy (you’re nicer than you have to be), you can sneak behind your agent’s back and just sell.